Information on Corporate Bankruptcy

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    Function

    • Most corporations initiate the bankruptcy process by filing a voluntary petition at the bankruptcy court in its principal state of registration. In some cases, creditors may force a corporation into an "involuntary" petition of bankruptcy. The business officers must file various financial documents along with the petition, including assets and liability, income and expenses, property ownership, secured creditors, unsecured creditors, leases and contracts and other paperwork. The owners must also file a disclosure statement, which describes the financial circumstances of the business. The court immediately sends out a court order called an "automatic stay," which prohibits creditors from pursuing any collection activities against the corporation. The court assigns a trustee to manage the case.

    Chapter 7

    • Some corporations have so much debt that the feasibility of recovering borders on impossible. The most logical choice for these corporations involves liquidation or Chapter 7. The bankruptcy court appoints a trustee who must gather the company's assets. The trustee returns collateral property to secured creditors and sells the other assets to raise cash. After paying the administration expenses and legal fees, the trustee distributes the remainder of the funds to the creditors. The court will notify creditors and bondholders that must file claims to get in line for payment.

    Assets

    • Under Chapter 7, when the trustee liquidates, the company's assets, secured creditors (such as banks) typically receive payment first. Next, unsecured creditors, which include banks, vendors, and corporate bondholders, have a claim on the funds. The owners of the corporation or the stockholders have the last claim on the assets---but only after the secured and unsecured creditors receive full payment.

    Chapter 11

    • Chapter 11 allows the corporation to reorganize its operation under the protection of the bankruptcy. The trustee appoints one or more committees to oversee the company through the restructuring process, which involves repaying its obligations. The plan must meet the approval of the creditors, bondholders and the shareholders. In addition, the court must approve the plan, which generally involves renegotiating contracts, leases, and extending the term of payments. The typical plan contains a list of claims, the corporation's creditor that received less value and any settlement the entity purpose. The plan should also list the votes cast for or against the plan.

    Conclusion

    • Under Chapter 7, once the trustee distributes the assets/funds to the creditors, the court closes the case. Unlike personal Chapter 7 cases, the court does not eliminate the debts. When the case closes, creditors may start the collection process again for any unpaid amounts. The bankruptcy court must count the votes for the reorganization plan. A confirmation hearing reveals whether the plan meets approval or not.

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